A loan-to-value covenant is a financial covenant in a secured loan under which the borrower undertakes that the amount owed will not exceed a specified percentage of the value of the security. It applies the loan-to-value ratio as a continuing test, not only at the date the loan is made.
The agreement sets the maximum ratio, the dates on which it is tested, and how value is determined, usually by an independent valuation that the lender may commission at intervals or when it suspects a fall. If the ratio is exceeded there is a covenant breach. Agreements commonly give the borrower cure rights: a short period in which to repay part of the loan, deposit cash or provide additional security to restore the ratio. The valuation method is discussed under collateral valuation for lending, and testing forms part of loan covenant monitoring.